Yesterday, the technology sector experienced a substantial loss, dropping over 2.5% amidst heavy selling. To put this into perspective, if we look at the tech sector’s performance since 1999, yesterday’s decline ranks in the top 5% of the largest daily losses and marks the biggest drop since December 2022.
For many investors, technology stocks have continued to drive recent performance. The common strategy has been to buy any significant dip in tech which recently has rewarded investors with above-average returns. But just how effective has this strategy been?
Consider this: Since March 2020, if an investor bought tech stocks on days when the market experienced similar declines as yesterday and held the position for one year, the average return was a remarkable 20.1%. That’s a very healthy return!
However, if we analyze the average one-year return of the tech sector following a top 5% decline day since 1999, the average return was only 5.3%. Excluding the exceptional post-COVID period, this one-year average return drops to just 2.7%. This is quite different from the significant performance investors have seen over the last four years.
This isn’t to suggest that technology can no longer be a market leader. However, in investing, it’s crucial to not focus on recent history and expect it to continue indefinitely into the future. While it’s possible that tech stocks could continue to deliver exceptional returns, the data suggests that caution is warranted.
Moving forward, Bruce Wood Capital will continue to look for signs of a potential rotation away from tech stocks and position our portfolio accordingly.
Stay informed, stay cautious, and make decisions based on data and analysis rather than human emotion.
